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<p style="font: bold 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0in"><font style="font: 10pt Times New Roman, Times, Serif"><b>Note
2. Going Concern</b></font></p>
<p style="font: bold 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">The
accompanying unaudited consolidated financial statements for the six months ended June 30, 2016 and 2015 have been prepared assuming
that we will continue as a going concern, and accordingly realize our assets and satisfy our liabilities in the normal course
of business.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 60pt"><font style="font: 10pt Times New Roman, Times, Serif">The
carrying amounts of assets and liabilities presented in the consolidated financial statements do not purport to represent realizable
or settlement values. As of June 30, 2016, we had negative working capital of approximately $19.1 million and defaulted on several
of our debt obligations. These conditions raise substantial doubt about our ability to continue as a going concern.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">Our
management is continuing its efforts to attempt to secure funds through equity and/or debt instruments for our operations, expansion
and possible acquisitions, mergers, joint ventures, and/or other business combinations. The Company will require additional funds
to pay down its liabilities, as well as finance its expansion plans consistent with anticipated changes in operations and infrastructure.
However, there can be no assurance that the Company will be able to secure additional funds and that if such funds are available,
whether the terms or conditions would be acceptable to the Company and whether the Company will be able to turn into a profitable
position and generate positive operating cash flow. The consolidated financial statements contain no adjustment for the outcome
of this uncertainty.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><b>Note
7. Legal Proceedings </b></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><b> </b></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">We
are involved in the following ongoing legal matters:</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">On
December 31, 2011, the Company and InfiniTek corporation (“InfiniTek”) entered into a settlement agreement to dismiss
an action filed by the Company against InfiniTek in the Texas State District Court in Fort Worth, Texas, for breach of contract
and other claims, a counter claim filed by InfiniTek against the Company for non-payment of amounts claimed the Company owed to
InfiniTek, and an action filed by InfiniTek against the Company in California Superior Court in Riverside, California seeking
damages for breach of contract and lost profit. Pursuant to the terms of the settlement agreement, Vertical agreed to pay InfiniTek
$82,500 in three equal installments with the last payment due by or before August 5, 2012. Upon full payment, InfiniTek shall
transfer and assign ownership of the NAVPath software developed by InfiniTek for use with NOW Solutions emPath® software
application and Microsoft Dynamics NAV (formerly Navision) business solution platform. The amounts in dispute were included in
our accounts payable and accrued liabilities and have been adjusted to the settlement amount of $82,500 at December 31, 2011.
The Company has made $37,500 in payments due under the settlement agreement as of the date of this Report and each party is alleging
the other party is in breach of the settlement agreement. We intend to resolve all disputes with InfiniTek.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">  </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">On
February 4, 2014, Victor Weber filed a lawsuit against Vertical, MRC and Richard Wade in the District Court of Clark County, Nevada
for failure to make payment of the outstanding balance due under a $275,000 promissory note issued by Vertical to Mr. Weber. On
July 24 2014, the court granted plaintiff’s motion for summary judgment against defendants. The judgment was filed on September
18, 2014. In June 2015, the Company and Mr. Weber entered into an agreement to pay off the $365,000 outstanding balance under
the judgment, which included $275,000 in principal, accrued interest, attorney’s fees and court costs. Under the terms of
the agreement, the Company issued 10,000,000 shares of its common stock with the Rule 144 restrictive legend to Mr. Weber at a
fair market value of $250,000 in consideration of Mr. Weber’s forbearance in not taking any action to enforce the judgment.
The Company also agreed to make payments of $100,000 by June 15, 2015 and $265,000 by July 15, 2015, or in the alternative, the
Company had the option to issue another 10,000,000 shares of the Company’s common stock with the Rule 144 restrictive legend
in lieu of making the $100,000 payment and issue an additional 15,000,000 shares of the Company’s common stock with the Rule
144 restrictive legend in lieu of making the $265,000 payment. On June 15, 2015, the Company issued 10,000,000 shares with the
Rule 144 restrictive legend at a fair market value of $250,000 to Mr. Weber as repayment of a $100,000 payment resulting in a
loss on extinguishment of $150,000. On July 15, 2015, the Company issued 15,000,000 shares with the Rule 144 restrictive legend
at a fair market value of $408,000 to Mr. Weber as repayment of the $265,000 payment. Pursuant to the agreement, Mr. Weber filed
disposition documents that the judgment has been satisfied and this matter is resolved.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><b><i>Earnings
per share</i></b></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><b><i> </i></b></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">Basic
earnings per share is calculated by dividing net income (loss) available to common stockholders by the weighted average number
of shares of the Company’s common stock outstanding during the period. “Diluted earnings per share” reflects
the potential dilution that could occur if our share-based awards and convertible securities were exercised or converted into
common stock. The dilutive effect of our share-based awards is computed using the treasury stock method, which assumes all share-based
awards are exercised and the hypothetical proceeds from exercise are used to purchase common stock at the average market price
during the period. The incremental shares (difference between shares assumed to be issued versus purchased), to the extent they
would have been dilutive, are included in the denominator of the diluted EPS calculation. The dilutive effect of our convertible
preferred stock and convertible debentures is computed using the if-converted method, which assumes conversion at the beginning
of the year.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">For
the six months ended June 30, 2016 and 2015, common stock equivalents related to the convertible debentures, convertible debt
and preferred stock and stock derivative liability were not included in the calculation of the diluted earnings per share as their
effect would be anti-dilutive.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><b><i>Reclassifications</i></b></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">Certain
reclassifications have been made to the prior periods to conform to the current period presentation.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0in"><font style="font: normal 10pt Times New Roman, Times, Serif"><i>Capitalized
Software Costs</i></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0in"><font style="font: normal 10pt Times New Roman, Times, Serif"><i> </i></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: normal 10pt Times New Roman, Times, Serif">Software
costs incurred internally in creating computer software products are expensed until technological feasibility has been established
upon completion of a detailed program design. Thereafter, all software development costs are capitalized until the point that
the product is ready for sale, and are subsequently reported at the lower of unamortized cost or net realizable value. The Company
considers annual amortization of capitalized software costs based on the ratio of current year revenues by product to the total
estimated revenues by the product, subject to an annual minimum based on straight-line amortization over the product’s estimated
economic useful life, not to exceed five years. The Company periodically reviews capitalized software costs for impairment where
the fair value is less than the carrying value.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: normal 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: normal 10pt Times New Roman, Times, Serif">During
the six months ended June 30, 2016 and 2015, the Company capitalized an aggregate of $250,184 and $266,615 respectively, related
to software development.</font></p>
<p style="font: bold 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0in"><font style="font: 10pt Times New Roman, Times, Serif"><b><i>Recently
Issued Accounting Pronouncements</i></b></font></p>
<p style="font: bold 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">The
Company does not expect the adoption of any recently issued accounting pronouncements to have a material impact on the Company’s
financial position, operations or cash flows.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">The
following table provides a summary of the fair value of our derivative liabilities as of June 30, 2016 and December 31, 2015:</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><i> </i></font></p>
<table cellspacing="0" cellpadding="0" style="font-size: 10pt; line-height: normal; width: 100%; border-collapse: collapse; font-size-adjust: none; font-stretch: normal">
<tr style="vertical-align: bottom">
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td colspan="10" style="border-bottom: black 1pt solid; text-align: center"><font style="font: 10pt Times New Roman, Times, Serif">Fair
value measurements on a recurring basis</font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td colspan="2" style="border-bottom: black 1pt solid; text-align: center"><font style="font: 10pt Times New Roman, Times, Serif">Level
1</font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td colspan="2" style="border-bottom: black 1pt solid; text-align: center"><font style="font: 10pt Times New Roman, Times, Serif">Level
2</font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td colspan="2" style="border-bottom: black 1pt solid; text-align: center"><font style="font: 10pt Times New Roman, Times, Serif">Level
3</font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td><font style="font: 10pt Times New Roman, Times, Serif">As of June 30, 2016:</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td><font style="font: 10pt Times New Roman, Times, Serif">Liabilities</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="width: 61%; text-align: left; padding-left: 0.125in"><font style="font: 10pt Times New Roman, Times, Serif">Derivative
liabilities – convertible debt and warrants</font></td>
<td style="width: 1%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 1%; text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="width: 10%; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">-</font></td>
<td style="width: 1%; text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 1%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 1%; text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="width: 10%; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">-</font></td>
<td style="width: 1%; text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 1%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 1%; text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="width: 10%; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">547,097</font></td>
<td style="width: 1%; text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td><font style="font: 10pt Times New Roman, Times, Serif">As of December 31, 2015:</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td><font style="font: 10pt Times New Roman, Times, Serif">Liabilities</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="padding-left: 10pt"><font style="font: 10pt Times New Roman, Times, Serif">None</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">-</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">-</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">-</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
</table>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">The
following table reflects our related party debt activity, including our convertible debt, for the six months ended June 30, 2016:</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<table cellspacing="0" cellpadding="0" style="font-size: 10pt; line-height: normal; width: 75%; margin-left: 0.75in; border-collapse: collapse; font-size-adjust: none; font-stretch: normal">
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="width: 79%"><font style="font: 10pt Times New Roman, Times, Serif">December 31, 2015</font></td>
<td style="width: 1%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 1%; text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="width: 18%; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">417,445</font></td>
<td style="width: 1%; text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">Reduction of principal
from issuance of stock</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">(130,000</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">Debt discounts due
to valuation of derivative liabilities</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">(51,412</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="text-align: left; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif">Amortization
of debt discounts</font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">10,342</font></td>
<td style="text-align: left; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif">June 30, 2016</font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="text-align: right; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">246,375</font></td>
<td style="text-align: left; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
</table>
0.75
0.80
0.70
0.93
0.845
0.90
1.00
250184
266615
P5Y
19100000
5813458
5397020
635000
-47639
63699
130000
100000
265000
-465124
278
6350000
300000
635000
213139
275000
30000
80000
80000
P1Y
P1Y
<p><font style="font: 10pt Times New Roman, Times, Serif">The holder of the debenture may convert the debenture
into shares of common stock at a price per share of 80% of the average per share price of the Company’s common stock for
the 5 trading days preceding the notice of conversion date using the 3 lowest closing prices.</font></p>
<p><font style="font: 10pt Times New Roman, Times, Serif">The holder of the debenture may convert the debenture
into shares of common stock at a price per share of 80% of the average per share price of the Company’s common stock for
the 5 trading days preceding the notice of conversion date using the 3 lowest closing prices.</font></p>
P3Y
P3Y
P3Y
6350000
300000
.0225
0.10
0.10
20000
306064
162651
1759150
1759150
Monthly
Monthly
24232
2500
22000
P10Y
<p><font style="font: 10pt Times New Roman, Times, Serif">Secured by the assets of the Company’s subsidiaries, NOW Solutions,
Priority Time, SnAPPnet, Inc. (“SnAPPnet”) and the Company’s SiteFlash™ technology and cross-collateralized.
Upon the aggregate principal payment of $290,000 toward the Lakeshore Note, the Company has the option to have Lakeshore release
either the Priority Time collateral or the SiteFlash™ collateral. Upon payment of the aggregate principal of $590,000 toward
the Lakeshore Note, Lakeshore shall release either the Priority Time collateral or the SiteFlash™ collateral (whichever
is remaining). Upon payment of the aggregate principal of $890,000 toward the Lakeshore Note, Lakeshore shall release the SnAPPnet
collateral and upon full payment of the Lakeshore Note, Lakeshore shall release the NOW Solutions collateral.</font></p>
290000
590000
890000
0.05
0.60
0.06
5000000
0.25
15000
391920
99210
2500
40000
11550
80000
0.20
0.20
150000
7000000
13000000
3000000
2000000
2000000
10000000
175700
455000
54200
0.0000
P1M17D
P3Y0M15D
1.19
1.31
0.0071
0.0107
547097
547097
353885
108539
111035
547097
6350000
0.097
0.091
0.10
6800000
13150000
15000000
1500000
66550
30
66520
44000
1000000
200000
5000000
5000000
1500000
10000000
92500
100000
37500
250000
100000
35969
11000
10000
10000000
450000
16650000
3500000
10000000
15000000
321525
78750
5000000
P3Y
P6M
P30M
P06M
P30M
715000
-1145
-1145
18250000
16600000
P2Y6M14D
246375
417445
162651
-130000
-51412
1652113
883190
82500
82500
37500
275000
365000
250000
408000
VCSY
0.20
3000000
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">The
Company estimated the fair value of the derivative liabilities using the Black-Scholes option pricing model and the following
key assumptions during 2016:</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<table cellspacing="0" cellpadding="0" align="center" style="width: 70%; border-collapse: collapse; font-size: 10pt">
<tr style="vertical-align: bottom">
<td nowrap="nowrap"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td nowrap="nowrap" style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td colspan="2" nowrap="nowrap" style="border-bottom: black 1pt solid; text-align: center"><font style="font: 10pt Times New Roman, Times, Serif">2016</font></td>
<td nowrap="nowrap" style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="background-color: rgb(204,238,255); vertical-align: bottom">
<td style="text-align: left; width: 79%"><font style="font: 10pt Times New Roman, Times, Serif">Expected
dividends</font></td>
<td style="width: 1%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left; width: 1%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right; width: 18%"><font style="font: 10pt Times New Roman, Times, Serif">0%</font></td>
<td style="text-align: left; width: 1%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="background-color: white; vertical-align: bottom">
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">Expected terms (years)</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">0.13 – 3.04</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="background-color: rgb(204,238,255); vertical-align: bottom">
<td><font style="font: 10pt Times New Roman, Times, Serif">Volatility</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">119% - 131%</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="background-color: white; vertical-align: bottom">
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">Risk-free rate</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">0.71% - 1.07%</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
</table>
66550
635000
10342
100000
50
99950
5000000
6350000
162651
63
162588
92500
50
92450
5000000
<p style="font: bold 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0in"><font style="font: 10pt Times New Roman, Times, Serif"><b>Note
1. Organization, Basis of Presentation and Significant Accounting Policies</b></font></p>
<p style="font: bold 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">The
accompanying unaudited interim consolidated financial statements of Vertical Computer Systems, Inc. (‘we”, “our”,
the “Company” or “Vertical”) have been prepared in accordance with accounting principles generally accepted
in the United States of America and rules of the Securities and Exchange Commission, and should be read in conjunction with
the audited consolidated financial statements and notes thereto contained in Vertical’s annual report on Form 10-K for the
year ended December 31, 2015. The consolidated financial statements include the accounts of the Company and its subsidiaries (collectively,
“our”, “we”, the “Company” or “VCSY”, as applicable). Vertical’s subsidiaries
which currently maintain daily business operations are NOW Solutions, a 75% owned subsidiary, and SnAPPnet, Inc. (“SnAPPnet”),
an 80% owned subsidiary of Vertical. Vertical’s subsidiaries which have minimal operations are Vertical do Brasil, Taladin,
Inc. (“Taladin"), and Vertical Healthcare Solutions, Inc. (“VHS”), each of which a wholly-owned subsidiary of
Vertical, as well as Priority Time Systems, Inc. (“Priority Time”) a 70% owned subsidiary, Ploinks, Inc. (“Ploinks”)
(formerly, OptVision Research, Inc.), a 93% owned subsidiary and Government Internet Systems, Inc. (“GIS”), an 84.5%
owned subsidiary. Vertical’s subsidiaries which are inactive include EnFacet, Inc. (“ENF”), Globalfare.com,
Inc. (“GFI”), Pointmail.com, Inc. and Vertical Internet Solutions, Inc. (“VIS”), each of which is a wholly-owned
subsidiary of Vertical.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">In
the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial
position and the results of operations for the interim periods presented have been reflected herein. The results of operations
for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the consolidated
financial statements which would substantially duplicate the disclosure contained in the audited financial statements as reported
in the 2015 annual report on Form 10-K have been omitted.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><b><i>Earnings
per share</i></b></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><b><i> </i></b></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">Basic
earnings per share is calculated by dividing net income (loss) available to common stockholders by the weighted average number
of shares of the Company’s common stock outstanding during the period. “Diluted earnings per share” reflects
the potential dilution that could occur if our share-based awards and convertible securities were exercised or converted into
common stock. The dilutive effect of our share-based awards is computed using the treasury stock method, which assumes all share-based
awards are exercised and the hypothetical proceeds from exercise are used to purchase common stock at the average market price
during the period. The incremental shares (difference between shares assumed to be issued versus purchased), to the extent they
would have been dilutive, are included in the denominator of the diluted EPS calculation. The dilutive effect of our convertible
preferred stock and convertible debentures is computed using the if-converted method, which assumes conversion at the beginning
of the year.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">For
the six months ended June 30, 2016 and 2015, common stock equivalents related to the convertible debentures, convertible debt
and preferred stock and stock derivative liability were not included in the calculation of the diluted earnings per share as their
effect would be anti-dilutive.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><b><i>Reclassifications</i></b></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">Certain
reclassifications have been made to the prior periods to conform to the current period presentation.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0in"><font style="font: 10pt Times New Roman, Times, Serif"><i>Capitalized
Software Costs</i></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0in"><font style="font: normal 10pt Times New Roman, Times, Serif"><i> </i></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: normal 10pt Times New Roman, Times, Serif">Software
costs incurred internally in creating computer software products are expensed until technological feasibility has been established
upon completion of a detailed program design. Thereafter, all software development costs are capitalized until the point that
the product is ready for sale, and are subsequently reported at the lower of unamortized cost or net realizable value. The Company
considers annual amortization of capitalized software costs based on the ratio of current year revenues by product to the total
estimated revenues by the product, subject to an annual minimum based on straight-line amortization over the product’s estimated
economic useful life, not to exceed five years. The Company periodically reviews capitalized software costs for impairment where
the fair value is less than the carrying value.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: normal 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: normal 10pt Times New Roman, Times, Serif">During
the six months ended June 30, 2016 and 2015, the Company capitalized an aggregate of $250,184 and $266,615 respectively, related
to software development.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"></p>
<p style="font: bold 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0in"><font style="font: 10pt Times New Roman, Times, Serif"><b><i>Recently
Issued Accounting Pronouncements</i></b></font></p>
<p style="font: bold 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">The
Company does not expect the adoption of any recently issued accounting pronouncements to have a material impact on the Company’s
financial position, operations or cash flows.</font></p>
54000
<p><font style="font: 10pt Times New Roman, Times, Serif">The lowest closing price of the common stock for
each of the 5 trading days immediately preceding the conversion date has been $0.03 or higher.</font></p>
<p><font style="font: 10pt Times New Roman, Times, Serif">Lowest closing price of the common stock for each
of the 5 trading days immediately preceding the conversion date has been $0.03 or higher.</font></p>
-1145
1154163121
26362
26362
137500
146500
100000
26362
353885
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><b>Note
3. Notes Payable</b></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">The
following table reflects our third party debt activity, including our convertible debt, for the six months ended June 30, 2016:</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<table align="center" cellspacing="0" cellpadding="0" style="font-size: 10pt; line-height: normal; width: 60%; border-collapse: collapse; font-size-adjust: none; font-stretch: normal">
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="width: 82%"><font style="font: 10pt Times New Roman, Times, Serif">December 31, 2015</font></td>
<td style="width: 1%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 1%; text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="width: 15%; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">5,397,020</font></td>
<td style="width: 1%; text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">Borrowings from convertible
debentures</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">635,000</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">Borrowings from notes
payable</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">61,900</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">Conversion of debt
principal to common stock</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">(47,639</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">Payments of third party
notes</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">(63,699</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">Debt discounts due
to stock, warrants and derivative liabilities</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">(465,124</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">Amortization of debt
discounts</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">295,722</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="text-align: left; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif">Effect
of currency exchange</font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">278</font></td>
<td style="text-align: left; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif">June 30, 2016</font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">5,813,458</font></td>
<td style="text-align: left; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
</table>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">During
the six months ended June 30, 2016, the Company issued convertible debentures in the aggregate principal amount of $635,000 to
various third party lenders for loans made to the Company in the same amount. The debts accrue interest at 10% per annum and are
due one year from the date of issuance. Beginning six months after issuance of the respective debentures and provided that the
lowest closing price of the common stock for each of the 5 trading days immediately preceding the conversion date has been $0.03
or higher, the holder of the respective debenture may convert the debenture into shares of common stock at a price per share of
80% of the average per share price of the Company’s common stock for the 5 trading days preceding the notice of conversion
date using the 3 lowest closing prices. In connection with the loans, the Company also issued a total of 6,350,000 shares of common
stock of the Company to the lenders with the Rule 144 restrictive legend and 3 year warrants under which each lender may purchase
in aggregate a total of 6,350,000 unregistered shares of common stock of the Company at a purchase price of $0.10 per share. In
connection with the issuance of shares of common stock and warrants, the Company recorded a discount of $162,651 against the face
value of the loans based on the relative fair market value of the common stock and full fair market value of the warrants. The
warrants are accounted for as derivative liabilities. The discount is being amortized over twelve months and $295,722 of amortization
expense was recognized for the six months ended June 30, 2016.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">During
the six months ended, June 30, 2016, $54,000 of principal, interest and fees under a convertible note issued in the principal
amount of $80,000 were converted into 3,931,973 unrestricted common shares of the Company.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"><i>Lakeshore
Financing</i></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">On
January 9, 2013, NOW Solutions completed a financing transaction in the aggregate amount of $1,759,150, which amount was utilized
to pay off existing indebtedness of the Company and NOW Solutions to Tara Financial Services and Robert Farias, a former employee
of the Company, and all security interests granted to Tara Financial Services and Mr. Farias were cancelled.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0"><font style="font: 10pt Times New Roman, Times, Serif"></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">In
connection with this financing, the Company and several of its subsidiaries entered into a loan agreement (the “<u>Loan
Agreement</u>”), dated as of January 9, 2013 with Lakeshore Investment, LLC (“<u>Lakeshore</u>”) under which
NOW Solutions issued a secured 10-year promissory note (the “<u>Lakeshore Note</u>”) bearing interest at 11% per annum
to Lakeshore in the amount of $1,759,150 payable in equal monthly installments of $24,232 until January 31, 2022. Upon the payment
of any prepayment principal amounts, the monthly installment payments shall be proportionately adjusted proportionately on an
amortized rata basis. </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">The
Lakeshore Note is secured by the assets of the Company’s subsidiaries, NOW Solutions, Priority Time, SnAPPnet, Inc. (“<u>SnAPPnet</u>”)
and the Company’s SiteFlash™ technology and cross-collateralized. Upon the aggregate principal payment of $290,000
toward the Lakeshore Note, the Company has the option to have Lakeshore release either the Priority Time collateral or the SiteFlash™
collateral. Upon payment of the aggregate principal of $590,000 toward the Lakeshore Note, Lakeshore shall release either the
Priority Time collateral or the SiteFlash™ collateral (whichever is remaining). Upon payment of the aggregate principal
of $890,000 toward the Lakeshore Note, Lakeshore shall release the SnAPPnet collateral and upon full payment of the Lakeshore
Note, Lakeshore shall release the NOW Solutions collateral.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">As
additional consideration for the loan, the Company granted a 5% interest in Net Claim Proceeds (less any attorney’s fees
and direct costs) from any litigation or settlement proceeds related to the SiteFlash™ technology to Lakeshore which was
increased to 8% under an amendment to the Loan Agreement in 2013. In addition, until the Note is paid in full, NOW Solutions agreed
to pay a Lakeshore royalty of 6% of its annual gross revenues in excess of $5 million dollars up to a maximum of $1,759,150. Management
has estimated the fair value of the royalty to be nominal as of its issuance date and no royalty was owed as of September 30,
2015 or December 31, 2014.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">In
December 2014, the Company and Lakeshore entered into an amendment of the Lakeshore Note and the Loan Agreement. Under the terms
of the amendment, NOW Solutions agreed to make $2,500 weekly advance payments to Lakeshore to be applied to the 25% dividend of
NOW Solutions’ net income after taxes in connection with Lakeshore’s 25% minority ownership interest in NOW Solutions.
Within 10 business days after the Company files its periodic reports with the SEC, NOW Solutions is required to make quarterly
payment advances to Lakeshore based on 60% of Lakeshore’s 25% share of NOW Solutions estimated quarterly net income after
taxes, less any weekly payment advances received by Lakeshore during the then-applicable quarter and the weekly $2,500 payments
shall be increased or decreased based only upon any increases or decreases of maintenance and cloud-based offering fees during
the then-completed quarter (but will not decrease below a minimum of $2,500 per week). NOW Solutions shall pay Lakeshore the balance
of Lakeshore’s 25% of NOW’s yearly net income after taxes (less any advances) within 10 business days after the Company
files it annual 10-K report with the SEC and any payments in excess of Lakeshore’s 25% of NOW yearly profit shall be credited
towards future weekly advance payments. The Company also agreed to pay attorney fees of $40,000 and paid fees of $80,000 to a
former consultant and employee of the Company who is a member of Lakeshore. In consideration of the extension to cure the default
under the Lakeshore Note and the Loan Agreement, the Company transferred a 20% ownership interest in Priority Time Systems, Inc.,
a 90% owned subsidiary of VCSY, and in SnAPPnet, Inc., a 100% owned subsidiary of VCSY, to Lakeshore. This resulted in an additional
non-controlling interest recognized in the equity of the Company of $391,920 and $99,210 for Priority Time Systems, Inc. and SnAPPnet,
Inc., respectively, during 2014. The Company had an option to buy back Lakeshore’s ownership interest in NOW Solutions,
Priority Time and SnAPPnet, Inc. (which expired on January 31, 2015).</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">In
July 2015, we entered into an agreement with Lakeshore to amend the terms of the Loan Agreement and the Lakeshore Note. Under
the terms of the amendment, the Company issued 13,000,000 common shares with the Rule 144 restrictive legend, resulting in a forbearance
loss of $455,000 and Ploinks agreed to issue 3,000,000 common shares of its stock to Lakeshore. The fair value of the Ploinks
shares was determined to be nominal. Also in July 2015, the Company further amended the Lakeshore Note and the Loan Agreement
with Lakeshore. Pursuant to this Agreement, the Company issued 2,000,000 shares of its common stock with the Rule 144 restrictive
legend resulting in a forbearance loss of $54,200 and paid $15,000 to Lakeshore as forbearance fees.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">In
August 2015, we entered into an agreement with Lakeshore to amend the terms of the Loan Agreement and the Lakeshore Note. Under
the terms of the amendment, the Company issued 7,000,000 shares of its common stock with the Rule 144 restrictive legend resulting
in a forbearance loss of $175,700 and Ploinks agreed to issue 2,000,000 common shares of its stock to Lakeshore. The fair value
of the Ploinks shares was determined to be nominal.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">In
January 2016, the Company re-amortized the Lakeshore Note at 11% interest per annum pursuant to the amendment of the Loan Agreement
and Note executed on August 6, 2015.  The Company has made all monthly installment payments towards the Note and the $2,500
weekly payments which will be applied toward Lakeshore’s share of dividends through the date of this Report.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">The
Lakeshore note is currently in default and the Company is currently in discussions with Lakeshore to resolve all outstanding issues,
including the reconciliation payment due on January 15, 2016.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">During
the six months ended June 30, 2016, NOW Solutions, a subsidiary of the Company, paid dividends to Lakeshore of $150,000. </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">The
following table reflects our third party debt activity, including our convertible debt, for the six months ended June 30, 2016:</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<table align="center" cellspacing="0" cellpadding="0" style="font-size: 10pt; line-height: normal; width: 60%; border-collapse: collapse; font-size-adjust: none; font-stretch: normal">
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="width: 82%"><font style="font: 10pt Times New Roman, Times, Serif">December 31, 2015</font></td>
<td style="width: 1%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 1%; text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="width: 15%; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">5,397,020</font></td>
<td style="width: 1%; text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">Borrowings from convertible
debentures</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">635,000</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">Borrowings from notes
payable</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">61,900</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">Conversion of debt
principal to common stock</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">(47,639</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">Payments of third party
notes</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">(63,699</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">Debt discounts due
to stock, warrants and derivative liabilities</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">(465,124</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">Amortization of debt
discounts</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">295,722</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="text-align: left; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif">Effect
of currency exchange</font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">278</font></td>
<td style="text-align: left; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif">June 30, 2016</font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">5,813,458</font></td></tr>
</table>
295722
295722
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><b>Note
4. Derivative liability and fair value measurements</b></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><b> </b></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"><i>Derivative
liability</i></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">During
2016, certain notes issued by the Company became convertible and qualified as derivative liabilities under ASC 815. In addition,
the outstanding common stock warrants associated with the notes became tainted and were required to be accounted for as derivative
liabilities under ASC 815.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">As
of June 30, 2016, the aggregate fair value of the outstanding derivative liabilities was $547,097. For the six months ended June
30, 2016, the net loss on the change in fair value of derivative liabilities was $111,035.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">The
Company estimated the fair value of the derivative liabilities using the Black-Scholes option pricing model and the following
key assumptions during 2016:</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<table align="center" cellspacing="0" cellpadding="0" style="font-size: 10pt; line-height: normal; width: 70%; border-collapse: collapse; font-size-adjust: none; font-stretch: normal">
<tr style="vertical-align: bottom">
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td colspan="2" style="border-bottom: black 1pt solid; text-align: center"><font style="font: 10pt Times New Roman, Times, Serif">2016</font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="width: 79%; text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">Expected
dividends</font></td>
<td style="width: 1%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 1%; text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 18%; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">0%</font></td>
<td style="width: 1%; text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">Expected terms (years)</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">0.13 – 3.04</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td><font style="font: 10pt Times New Roman, Times, Serif">Volatility</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">119% - 131%</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">Risk-free rate</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">0.71% - 1.07%</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
</table>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">  </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> <i>Fair
value measurements</i></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><i> </i></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">FASB
ASC 820, Fair Value Measurements and Disclosures, defines fair value as the exchange price that would be received for an asset
or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an
orderly transaction between market participants on the measurement date. FASB ASC 820 also establishes a fair value hierarchy
which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair
value. FASB ASC 820 describes three levels of inputs that may be used to measure fair value:</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0 0 0 0.5in; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><i>Level
1 </i>– Quoted prices in active markets for identical assets or liabilities.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0 0 0 0.5in; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><i> </i></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0 0 0 0.5in; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><i>Level
2 </i>– Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs
that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0 0 0 0.5in; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0 0 0 0.5in; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><i>Level
3 </i>– Unobservable inputs that are supported by little or no market activity and that are financial instruments whose
values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments
for which the determination of fair value requires significant judgment or estimation.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0 0 0 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"><i> </i></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">If
the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization
is based on the lowest level of input that is significant to the fair value measurement of the instrument.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">The
following table provides a summary of the fair value of our derivative liabilities as of June 30, 2016 and December 31, 2015:</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><i> </i></font></p>
<table cellspacing="0" cellpadding="0" style="font-size: 10pt; line-height: normal; width: 100%; border-collapse: collapse; font-size-adjust: none; font-stretch: normal">
<tr style="vertical-align: bottom">
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td colspan="10" style="border-bottom: black 1pt solid; text-align: center"><font style="font: 10pt Times New Roman, Times, Serif">Fair
value measurements on a recurring basis</font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom">
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td colspan="2" style="border-bottom: black 1pt solid; text-align: center"><font style="font: 10pt Times New Roman, Times, Serif">Level
1</font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td colspan="2" style="border-bottom: black 1pt solid; text-align: center"><font style="font: 10pt Times New Roman, Times, Serif">Level
2</font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td colspan="2" style="border-bottom: black 1pt solid; text-align: center"><font style="font: 10pt Times New Roman, Times, Serif">Level
3</font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td><font style="font: 10pt Times New Roman, Times, Serif">As of June 30, 2016:</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td><font style="font: 10pt Times New Roman, Times, Serif">Liabilities</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="width: 61%; text-align: left; padding-left: 0.125in"><font style="font: 10pt Times New Roman, Times, Serif">Derivative
liabilities – convertible debt and warrants</font></td>
<td style="width: 1%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 1%; text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="width: 10%; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">-</font></td>
<td style="width: 1%; text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 1%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 1%; text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="width: 10%; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">-</font></td>
<td style="width: 1%; text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 1%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 1%; text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="width: 10%; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">547,097</font></td>
<td style="width: 1%; text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td><font style="font: 10pt Times New Roman, Times, Serif">As of December 31, 2015:</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td><font style="font: 10pt Times New Roman, Times, Serif">Liabilities</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="padding-left: 10pt"><font style="font: 10pt Times New Roman, Times, Serif">None</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">-</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">-</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">-</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
</table>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">The
estimated fair value of short-term financial instruments, including cash, accounts receivable, accounts payable and accrued liabilities
and deferred revenue approximates their carrying value due to their short-term nature. The Company uses Level 3 inputs to estimate
the fair value of its derivative liabilities.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">The
below table presents the change in the fair value of the derivative liabilities during the six months ended June 30, 2016:</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<table cellspacing="0" cellpadding="0" style="font-size: 10pt; line-height: normal; width: 75%; margin-left: 0.5in; border-collapse: collapse; font-size-adjust: none; font-stretch: normal">
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td><font style="font: 10pt Times New Roman, Times, Serif">Fair value as of December 31, 2015</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">-</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="width: 82%; text-align: left; padding-left: 9pt"><font style="font: 10pt Times New Roman, Times, Serif">Additions
recognized as debt discounts</font></td>
<td style="width: 1%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 1%; text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 15%; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">353,885</font></td>
<td style="width: 1%; text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="text-align: left; padding-left: 9pt"><font style="font: 10pt Times New Roman, Times, Serif">Additions
reclassified from equity</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">108,539</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="text-align: left; padding-left: 9pt"><font style="font: 10pt Times New Roman, Times, Serif">Reduction
due to settlement on conversion</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">(26,362</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="text-align: left; padding-bottom: 1pt; padding-left: 9pt"><font style="font: 10pt Times New Roman, Times, Serif">Loss
on change in fair value of derivatives</font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">111,035</font></td>
<td style="text-align: left; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif">Fair value as of
June 30, 2016</font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="text-align: right; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">547,097</font></td>
<td style="text-align: left; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
</table>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">The
below table presents the change in the fair value of the derivative liabilities during the six months ended June 30, 2016:</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<table cellspacing="0" cellpadding="0" style="font-size: 10pt; line-height: normal; width: 75%; margin-left: 0.5in; border-collapse: collapse; font-size-adjust: none; font-stretch: normal">
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td><font style="font: 10pt Times New Roman, Times, Serif">Fair value as of December 31, 2015</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">-</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="width: 82%; text-align: left; padding-left: 9pt"><font style="font: 10pt Times New Roman, Times, Serif">Additions
recognized as debt discounts</font></td>
<td style="width: 1%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 1%; text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 15%; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">353,885</font></td>
<td style="width: 1%; text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="text-align: left; padding-left: 9pt"><font style="font: 10pt Times New Roman, Times, Serif">Additions
reclassified from equity</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">108,539</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="text-align: left; padding-left: 9pt"><font style="font: 10pt Times New Roman, Times, Serif">Reduction
due to settlement on conversion</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">(26,362</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="text-align: left; padding-bottom: 1pt; padding-left: 9pt"><font style="font: 10pt Times New Roman, Times, Serif">Loss
on change in fair value of derivatives</font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">111,035</font></td>
<td style="text-align: left; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif">Fair value as of
June 30, 2016</font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="text-align: right; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">547,097</font></td>
<td style="text-align: left; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
</table>
-26362
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><b>Note
5. Common and Preferred Stock Transactions</b></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">In
January 2016, the Company granted 2,000,000 unregistered shares of its common stock with the Rule 144 restrictive legend and 200,000
shares of Ploinks common stock to a consultant of the Company and its subsidiaries pursuant to a consulting agreement with the
Company. The aggregate fair market value of the 2,000,000 share award was determined to be $44,000. In addition, the Company agreed
to issue up to 15,000,000 common shares of the Company and 1,500,000 shares of Ploinks common stock pursuant to restricted performance
stock agreements with the consultant. These shares may vest over a term of 3 years and are based upon the Consultant achieving
certain performance criteria.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">In
March 2016, the Company cancelled 1,000,000 unregistered shares of its common stock issued during 2015 to a third party lender
under an agreement to amend certain promissory notes issued by the Company and NOW Solutions in the aggregate principal amount
of $715,000. Under the amendment, the Company agreed to make $22,000 monthly payments and an additional $10,000 penalty if such
monthly payment is not timely made. The cancellation resulted in the reversal of forbearance fees expense of $28,900 during the
three months ended March 31, 2016.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">In
March 2016, the Company issued 10,000,000 shares of the Company’s common stock with the Rule 144 restrictive legend to its
consolidated subsidiary Ploinks. These shares are held in treasury.  In exchange, Ploinks issued 5,000,000 of its common
shares to the Company.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">In
April 2016, the Company and a third party noteholder entered into an agreement under which the Company issued 5,000,000 shares
of the Company’s common stock with the Rule 144 restrictive legend in exchange for the cancellation of $130,000 in principal
owed under a note payable issued by NOW Solutions with a principal amount of $213,139. The fair market value of the shares was
$92,500. A gain on debt extinguishment of $37,500 was recorded for the period ended June 30, 2016.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">In
May 2016, the Company and William Mills entered into an agreement under which the Company issued 5,000,000 shares of the Company’s
common stock with the Rule 144 restrictive legend to Mr. Mills in exchange for the cancellation of $100,000 in fees owed for services
rendered by Mr. Mills as a Director and Secretary of the Company. The fair market value of the shares was $100,000. William Mills
is a partner of Parker Mills and the Secretary and a Director of the Company.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">In
May 2016, the Company and a third party entered into an agreement under which the Company issued 1,500,000 shares of the Company’s
common stock with the Rule 144 restrictive legend to the third party in lieu of paying $35,969 in fees, expenses, and interest
owed to the third party for services rendered to the Company and its subsidiaries.  The fair market value of the shares issued
was $37,500.  A loss on debt extinguishment of $1,531 was recorded for the period ended June 30, 2016.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">In
May 2016, the Company issued 500,000 shares of the Company’s common stock with the Rule 144 restrictive legend to a third
party for services rendered. The fair market value of the shares was $11,550 and was recorded as legal fees for the period ended
June 30, 2016.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">Also
in May 2016, the Company issued 500,000 shares of the Company’s common stock with the Rule 144 restrictive legend to another
third party for services rendered. The fair market value of the shares was $11,000 and was recorded as tax consulting fees for
the period ended June 30, 2016.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">In
June 2016, the Company granted 1,500,000 unregistered shares of the Company’s common stock with the Rule 144 restrictive
legend to a consultant of the Company and its subsidiaries pursuant to a restricted stock agreement with the Company under which
the shares vest in equal installments over a 6 month to 30-month period. The fair market value of the shares was $33,750 and is
being amortized to expense over the vesting period. For the period ended June 30, 2016, $3,737 was amortized to stock compensation
expense.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">In
June 2016, the Company granted 3,500,000 unregistered shares of the Company’s common stock with the Rule 144 restrictive
legend to employees and a former employee of the Company and its subsidiaries pursuant to an amended agreement to defer payroll.
For additional details, please see “Related Party Transactions” in Note 6. The fair market value of the shares was
$78,750.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">During
the six months ended June 30, 2016, the Company issued convertible debentures in the aggregate principal amount of $635,000 to
various third party lenders for loans made to the Company in the same amount. The debts accrue interest at 10% per annum and are
due one year from the date of issuance. Beginning six months after issuance of the respective debentures and provided that the
lowest closing price of the common stock for each of the 5 trading days immediately preceding the conversion date has been $0.03
or higher, the holder of the respective debenture may convert the debenture into shares of common stock at a price per share of
80% of the average per share price of the Company’s common stock for the 5 trading days preceding the notice of conversion
date using the 3 lowest closing prices. In connection with the loans, the Company also issued a total of 6,350,000 shares of common
stock of the Company to the lenders with the Rule 144 restrictive legend and 3 year warrants under which each lender may purchase
in aggregate a total of 6,350,000 unregistered shares of common stock of the Company at a purchase price of $0.10 per share. In
connection with the issuance of shares of common stock and warrants, the Company recorded a discount of $162,651 against the face
value of the loans based on the relative fair market value of the common stock and full fair market value of the warrants. The
discount is being amortized over twelve months and $295,722 of amortization expense was recognized for the six months ended June
30, 2016.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">During
the six months ended, June 30, 2016, $54,000 of principal, interest and fees under a convertible note issued in the principal
amount of $80,000 were converted into 3,931,973 unrestricted common shares of the Company.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">During
the six months ended June 30, 2016, 450,000 VCSY common shares issued under restricted stock agreements to consultants and employees
of the Company vested.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">During
the six months ended June 30, 2016, the Company issued restricted stock agreements for 16,650,000 shares of the Company’s
common stock with the Rule 144 restrictive legend to employees of the Company and a subsidiary of the Company (at a fair market
value of $321,525), under which the shares typically vest in equal installments over a 6 month to 30-month period.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">During
the six months ended June 30, 2016, the<b> </b>Company cancelled 200,000 previously awarded but unvested unregistered shares of
the Company’s common stock issued to an employee of the Company when the employee resigned. This resulted in the reversal
of previously recognized compensation expense of $1,145 during the six months ended June 30, 2016.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">Stock
compensation expense for the amortization of restricted stock awards was $62,556 for the six months ended June 30, 2016. As of
June 30, 2016, there were 18,250,000 shares of unvested stock compensation awards to employees and 16,600,000 shares of unvested
stock compensation awards to non-employees.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">We
have evaluated our convertible cumulative preferred stock under the guidance set out in FASB ASC 470-20 and accordingly classified
these shares as temporary equity in the consolidated balance sheets.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">Option
and warrant activities during the six months ended June 30, 2016 is summarized as follows:</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<table cellspacing="0" cellpadding="0" style="font-size: 10pt; line-height: normal; width: 93%; margin-left: 0.1in; border-collapse: collapse; font-size-adjust: none; font-stretch: normal">
<tr style="vertical-align: bottom">
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td colspan="2" style="border-bottom: black 1pt solid; text-align: center"><font style="font: 10pt Times New Roman, Times, Serif">Incentive Stock<br />
Options</font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td colspan="2" style="border-bottom: black 1pt solid; text-align: center"><font style="font: 10pt Times New Roman, Times, Serif">Non-Statutory<br />
Stock Options</font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td colspan="2" style="border-bottom: black 1pt solid; text-align: center"><font style="font: 10pt Times New Roman, Times, Serif">Warrants</font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td colspan="2" style="border-bottom: black 1pt solid; text-align: center"><font style="font: 10pt Times New Roman, Times, Serif">Weighted<br />
Average Exercise<br /> Price</font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="width: 48%; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif">Outstanding
at December 31, 2015</font></td>
<td style="width: 1%; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 1%; text-align: left; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 10%; text-align: right; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">-</font></td>
<td style="width: 1%; text-align: left; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 1%; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 1%; text-align: left; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 10%; text-align: right; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">-</font></td>
<td style="width: 1%; text-align: left; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 1%; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 1%; text-align: left; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 10%; text-align: right; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">6,800,000</font></td>
<td style="width: 1%; text-align: left; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 1%; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 1%; text-align: left; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="width: 10%; text-align: right; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">.091</font></td>
<td style="width: 1%; text-align: left; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">Options/Warrants granted</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">-</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">-</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">6,350,000</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">0.10</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">Options/Warrants exercised</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">-</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">-</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">-</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">-</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="text-align: left; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif">Options/Warrants
expired/cancelled</font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">-</font></td>
<td style="text-align: left; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">-</font></td>
<td style="text-align: left; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">-</font></td>
<td style="text-align: left; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">-</font></td>
<td style="text-align: left; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="padding-bottom: 2.5pt"><font style="font: 10pt Times New Roman, Times, Serif">Outstanding at
June 30, 2016</font></td>
<td style="padding-bottom: 2.5pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left; border-bottom: black 2.5pt double"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right; border-bottom: black 2.5pt double"><font style="font: 10pt Times New Roman, Times, Serif">-</font></td>
<td style="text-align: left; padding-bottom: 2.5pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="padding-bottom: 2.5pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left; border-bottom: black 2.5pt double"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right; border-bottom: black 2.5pt double"><font style="font: 10pt Times New Roman, Times, Serif">-</font></td>
<td style="text-align: left; padding-bottom: 2.5pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="padding-bottom: 2.5pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left; border-bottom: black 2.5pt double"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right; border-bottom: black 2.5pt double"><font style="font: 10pt Times New Roman, Times, Serif">13,150,000</font></td>
<td style="text-align: left; padding-bottom: 2.5pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="padding-bottom: 2.5pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left; border-bottom: black 2.5pt double"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="text-align: right; border-bottom: black 2.5pt double"><font style="font: 10pt Times New Roman, Times, Serif">.097</font></td>
<td style="text-align: left; padding-bottom: 2.5pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
</table>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">The
weighted average remaining life of the outstanding warrants as of June 30, 2016 was 2.54. The intrinsic value of the exercisable
warrants as of June 30, 2016 was $.0225.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">Option
and warrant activities during the six months ended June 30, 2016 is summarized as follows:</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<table cellspacing="0" cellpadding="0" style="font-size: 10pt; line-height: normal; width: 93%; margin-left: 0.1in; border-collapse: collapse; font-size-adjust: none; font-stretch: normal">
<tr style="vertical-align: bottom">
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td colspan="2" style="border-bottom: black 1pt solid; text-align: center"><font style="font: 10pt Times New Roman, Times, Serif">Incentive Stock<br />
Options</font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td colspan="2" style="border-bottom: black 1pt solid; text-align: center"><font style="font: 10pt Times New Roman, Times, Serif">Non-Statutory<br />
Stock Options</font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td colspan="2" style="border-bottom: black 1pt solid; text-align: center"><font style="font: 10pt Times New Roman, Times, Serif">Warrants</font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td colspan="2" style="border-bottom: black 1pt solid; text-align: center"><font style="font: 10pt Times New Roman, Times, Serif">Weighted<br />
Average Exercise<br /> Price</font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="width: 48%; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif">Outstanding
at December 31, 2015</font></td>
<td style="width: 1%; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 1%; text-align: left; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 10%; text-align: right; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">-</font></td>
<td style="width: 1%; text-align: left; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 1%; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 1%; text-align: left; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 10%; text-align: right; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">-</font></td>
<td style="width: 1%; text-align: left; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 1%; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 1%; text-align: left; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 10%; text-align: right; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">6,800,000</font></td>
<td style="width: 1%; text-align: left; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 1%; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 1%; text-align: left; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="width: 10%; text-align: right; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">.091</font></td>
<td style="width: 1%; text-align: left; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">Options/Warrants granted</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">-</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">-</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">6,350,000</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">0.10</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">Options/Warrants exercised</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">-</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">-</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">-</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">-</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="text-align: left; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif">Options/Warrants
expired/cancelled</font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">-</font></td>
<td style="text-align: left; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">-</font></td>
<td style="text-align: left; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">-</font></td>
<td style="text-align: left; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">-</font></td>
<td style="text-align: left; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="padding-bottom: 2.5pt"><font style="font: 10pt Times New Roman, Times, Serif">Outstanding at
June 30, 2016</font></td>
<td style="padding-bottom: 2.5pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left; border-bottom: black 2.5pt double"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right; border-bottom: black 2.5pt double"><font style="font: 10pt Times New Roman, Times, Serif">-</font></td>
<td style="text-align: left; padding-bottom: 2.5pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="padding-bottom: 2.5pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left; border-bottom: black 2.5pt double"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right; border-bottom: black 2.5pt double"><font style="font: 10pt Times New Roman, Times, Serif">-</font></td>
<td style="text-align: left; padding-bottom: 2.5pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="padding-bottom: 2.5pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left; border-bottom: black 2.5pt double"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right; border-bottom: black 2.5pt double"><font style="font: 10pt Times New Roman, Times, Serif">13,150,000</font></td>
<td style="text-align: left; padding-bottom: 2.5pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="padding-bottom: 2.5pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left; border-bottom: black 2.5pt double"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="text-align: right; border-bottom: black 2.5pt double"><font style="font: 10pt Times New Roman, Times, Serif">.097</font></td>
<td style="text-align: left; padding-bottom: 2.5pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
</table>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><b>Note
6. Related Party Transactions</b></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><b> </b></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">The
following table reflects our related party debt activity, including our convertible debt, for the six months ended June 30, 2016:</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<table cellspacing="0" cellpadding="0" style="font-size: 10pt; line-height: normal; width: 75%; margin-left: 0.75in; border-collapse: collapse; font-size-adjust: none; font-stretch: normal">
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="width: 79%"><font style="font: 10pt Times New Roman, Times, Serif">December 31, 2015</font></td>
<td style="width: 1%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 1%; text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="width: 18%; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">417,445</font></td>
<td style="width: 1%; text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">Reduction of principal
from issuance of stock</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">(130,000</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">Debt discounts due
to valuation of derivative liabilities</font></td>
<td><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">(51,412</font></td>
<td style="text-align: left"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="text-align: left; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif">Amortization
of debt discounts</font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: right; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">10,342</font></td>
<td style="text-align: left; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom; background-color: rgb(204, 238, 255)">
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif">June 30, 2016</font></td>
<td style="padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="text-align: left; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="text-align: right; border-bottom: black 1pt solid"><font style="font: 10pt Times New Roman, Times, Serif">246,375</font></td>
<td style="text-align: left; padding-bottom: 1pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
</table>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">As
of June 30, 2016 and December 31, 2015, the Company had accounts payable to employees for unreimbursed expenses and related party
contractors in an aggregate amount of $135,013 and $108,379, respectively. The payables are unsecured, non-interest bearing and
due on demand.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">In
May 2016, the Company and William Mills entered into an agreement under which the Company issued 5,000,000 shares of the Company’s
common stock with the Rule 144 restrictive legend to Mr. Mills in exchange for the cancellation of $100,000 in fees owed services
rendered by Mr. Mills as a Director and Secretary of the Company. The fair market value of the shares was $100,000. William Mills
is a partner of Parker Mills and the Secretary and a Director of the Company.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">On
June 30, 2016, the Company amended an agreement (originally entered into in July 2010) with certain former and current employees
of the Company, concerning the deferral of payroll claims of approximately $883,190 for salary earned from 2012 to June 30, 2016
and $1,652,113 for salary earned from 2001 to 2012, which remain unpaid and is reflected as a current liability on the Company’s
consolidated financial statements.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">Pursuant
to the terms of the amended agreement, each current and former employee who is a party to the agreement (the “Employee(s)”)
agreed to defer payment of salary from the date of the agreement (“Salary Deferral”) for a period of three months
for salary earned from July 1, 2012 to June 30, 2016 and for a period of six months for salary earned from 2001 to June 30, 2012.
In consideration for the Salary Deferral, the Company issued a total 3,500,000 shares of the Company’s common stock with
the Rule 144 restrictive legend (at a fair market value of $78,750) and agreed to pay each Employee a sum equal to the amount
of unpaid salary at December 31, 2003 plus the amount of unpaid salary at the end of any calendar year after 2003 in which such
salary was earned, plus nine percent interest, compounded annually until such time as the unpaid salary has been paid in full.
The Company and the Employees have agreed that the deferred salary plus the Bonus will be paid from amounts anticipated to be
paid to the Company in respect of specified intellectual property assets of the Company.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">In
order to effect the payments due under the agreement, the Company assigned to the Employees a twenty percent interest in any net
proceeds (gross proceeds less attorney’s fees and direct costs) derived from infringement claims and any license fees paid
by a subsidiary of the Company or third party to the Company regarding (a) U.S. patent #6,826,744 and U.S. patent #7,716,629 (plus
any continuation patents) on Adhesive Software’s SiteFlash™ Technology, (b) U.S. patent #7,076,521 (plus any continuation
patents) in respect of “Web-Based Collaborative Data Collection System”, and (c) U.S. patent U.S. Patent No. #8,578,266
and #9,405,736 (plus any continuation patents) in respect to “Method and System for Automatically Downloading and Storing
Markup Language Documents into a Folder Based Data Structure.”</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><b>Note
8. Subsequent Events</b></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif"><b> </b></font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">On
August 2, 2016, the United States Patent and Trademark Office (“USPTO”) granted U.S. Patent No. 9,405,736 to VCSY,
which is a continuation of U.S. Patent No. 8,578,266.  This patent is titled “Method and System for Automatically Downloading
and Storing Markup Language Documents into a Folder Based Data Structure,” and forms the basis of the Emily ™ scripting
language.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">In
August 2016, 1,000,000 shares of stock issued to an employee pursuant to an amended agreement to defer payroll and 1,500,000 shares
of restricted stock was cancelled.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">During
the period that runs from July 1, 2016 through August 22, 2016, the Company issued convertible debentures in the aggregate principal
amount of $30,000 to third party lenders for loans made to the Company in the same amount. The debts accrue interest at 10% per
annum and are due one year from the date of issuance. Beginning six months after issuance of the respective debentures and provided
that the lowest closing price of the common stock for each of the 5 trading days immediately preceding the conversion date has
been $0.03 or higher, the holder of the respective debenture may convert the debenture into shares of common stock at a price
per share of 80% of the average per share price of the Company’s common stock for the 5 trading days preceding the notice
of conversion date using the 3 lowest closing prices. In connection with the loan, the Company also issued to the lender a total
of 300,000 shares of common stock of the Company with the Rule 144 restrictive legend and 3-year warrants under which the lenders
may purchase in aggregate a total of 300,000 unregistered shares of common stock of the Company at a purchase price of $0.10 per
share.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">During
the period that runs from July 1, 2016 through August 22, 2016, $20,000 of principal, interest and fees under a convertible note
issued in the principal amount of $80,000 was converted into 1,279,492 unrestricted common shares of the Company.</font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><font style="font: 10pt Times New Roman, Times, Serif">During
the period that runs from July 1, 2016 through August 22, 2016, 250,000 VCSY common shares issued under restricted stock agreements
to consultants and employees of the Company vested.</font></p>
1500000
150000
35969
3500000
78750
1000000